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Friday December 11, 2009 - 16:57:07 GMT
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FX Briefing -

FX Briefing 11 December 2009

Highlights

Bernanke sees “formidable headwinds” for economy, dampening exit expectations

Rating agencies warn about rising public debt in Greece, Portugal and Spain

Eurozone industrial production likely to have contracted in October

Bundesbank president Weber signals rise in money market rates

 

More credit rating problems

EUR-USD seems for now to have given up all attempts of reaching new highs before the end of the year: after the release of the US labour market figures at the end of last week, it dropped below 1.49 initially; during the course of this week, it slipped below 1.48, and even below 1.47 temporarily.

 

Although both movements were in favour of the dollar, each was motivated by quite different factors. The US labour market figures had been better than expected, fuelling speculation that the Fed could embark on an exit from its quantitative easing policy earlier. Interest rates and yields had gone up accordingly.

 

Then Fed chairman Ben Bernanke hastened to dampen exaggerated euphoria about an impending policy shift. In a speech on Monday, he emphasized that, despite increased signs of recovery, the US economy was facing “formidable headwinds”. At least with a view to the upcoming open market committee meeting on 16 December, he did not reveal any intention of changing the policy stance.

 

Mr Bernanke’s warning about “headwinds” coincided with markets focusing increasingly on credit risks. They had not yet fully digested the debt problems in Dubai, when rating agencies triggered fresh fears: Moody’s led the way by making a subtle distinction between the AAA ratings on Canada, Germany or France, termed “resistant”, and the ratings on the UK and the US,which were only “resilient”. On Tuesday, it was reported that Fitch had downgraded its rating on Greece for the second time in the space of less than two months, from A- to BBB+. S&P put Greece, Portugal and also Spain on negative credit watch.

 

Credit spreads widened markedly on the rating reports. The interest rate spread between Bunds and 10-year Greek government bonds, for example, rose by around 80 basis points to almost 250 basis points. Mounting crisis fears weighed on the euro at the same time, whereas the dollar and the yen, both typical funding currencies for carry trades and other more risky investments, particularly commodities, strengthened.

 

Data on industrial new orders and production in the eurozone turned out to be weaker than expected, which was also a drag on the euro. In Germany, industrial production contracted by

1.8% in October, in France and the Netherlands by 0.8% respectively; Italy was the only country to post a slight increase. Thus growth in Q4 is set to be much weaker than in the previous quarter. Remarks made by Bundesbank president Axel Weber on the development of interest rates in the short maturity segment of the money market, though striking, have not as yet sparked a significant market reaction. At the press conference, ECB president Jean-Claude Trichet had said that the measures announced were not intended to lead to a rise in the overnight rate. According to Mr Weber, as liquidity management normalises, the Eonia rate could go up gradually. At least he expects the Eonia rate to remain below the central bank rate in the first quarter.

 

In line with this notion, the Bundesbank’s latest Financial Stability Report had pointed out that banks’ bidding behaviour would contribute to reducing excess liquidity in the money market, even if full allotment at refinancing operations is maintained. In this case, the overnight rate ought to converge with the refi rate.

Stephan Rieke +49 69 718-4114.

 

 

Economics Department

+49 69 718-3642

volkswirtschaft@bhf-bank.com

Foreign Exchange Trading

devisenhandel@bhf-bank.com

Jörg Isselmann

+49 69 718-2695

Matthias Grabbe / Klaus Näfken

+49 69 718-2688

 

This report has been prepared by BHF-BANK Aktiengesellschaft on behalf of itself and its affiliated companies (together "BHF-BANK Group") solely for the information of its clients. The information and opinions in this document are based on sources believed to be reliable and acting in good faith, but no representation or warranty, express or implied, is made by any member of the BHF-BANK Group as to their accuracy, completeness or correctness. Opinions and recommendations are given in good faith but without legal responsibility and are subject to change without notice. The information does not constitute advice or personal recommendation, for which the duty of suitability would be owed, but may facilitate your own investment decision. Moreover, you should seek your own advice as to the suitability of an investment matter mentioned herein. Investors are reminded that the price of securities and the income from them can go down as well as up and that the past performance of an investment or a market is not necessarily indicative for future results. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete, and this document is not, and should not be construed as, an offer to sell or solicitation of any offer to buy the securities mentioned in it. BHF-BANK Group and its officers and employees may have a long or short position or engage in transactions in any of the securities mentioned in this document, or in any related securities. This publication must not be distributed in the United States.

© 2007 BHF-BANK Aktiengesellschaft

All rights reserved. Please mention source when quoting from it.

 


 

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